A Trust Is an Obligation Which Binds a Person

A trust is an obligation which binds a person (or persons) to deal with property for the benefit of beneficiaries or for a charitable purpose in accordance with the terms of the trust (Chetcuti Cauchi Advocates, no date). It can come into existence in any manner, by an instrument in writing (including a will), by a unilateral declaration, by operation of law and also by oral declaration.

When a trust is created orally, the law requires that there is sufficient evidence of the setlor’s intention to create a trust. In the absence of unequivocal evidence of this intention the law will presume that the person intended mandate or deposit and not the creation to a trust (Dr. M.Bianchi, 2005). The most efficient method of establishing a trust is by a written document since it mitigates the possibility of misunderstanding or legal challenge to the validity of the trust. However there is no legal necessity for this document, as it is possible to create a trust by simply verbal communicating a desire to do so (Anon, 2010).

“A valid declaration of trust over personal property will not require any formality, provided it can be demonstrated that the settlor intended to create an immediate trust over the property. In relation to property to be made subject to a trust on death, in relation to trusts of land, and in relation to certain other property, there will be statutory formalities to be satisfied before a valid trust will be created” (Hudson 2007, p.207).

Specifically in the case of unit trusts and inter-vivos trusts, these cannot be created by an oral declaration. Both of them are generally created by a written instrument. One of the key distinctions that can be made in creating a trust is that between inter-vivos (or living) trust and testamentary trusts. A living trust is created during the lifetime of the settlor and comes into effect within this period. On the other hand, a testamentary trust is a trust created by will, which comes into effect only upon the settlor’s death. These two may have significant differences in the formalities implied for creating and changing the trust as well as the costs involved. There are also differences that may be significant in certain circumstances, depending upon the specific objectives that one is trying to achieve.

A trust may continue for up to 100 years from the date of its existence. The amendments to the Trusts and Trustees Act (by means of Act XII of 2006) enable retirement schemes set up as trusts to continue past the 100th anniversary of the date on which the trust comes into existence (Dr A. Cremona, Ganado & Associates, 2008). This also applies to unit trusts and charitable trusts.

There are a number of reasons why a Trust may be created. These are commonly used by high-net worth individuals to plan their financial affairs and provide for other individuals, including future generations. Hence, trusts play a major role in the process of asset holding, asset protection and succession planning (Monica Galea, 2010).

2.2 The three certainties of a valid trust

The three main certainties refer to a rule which was stated in the UK case of Knight vs Knight. Lord Langdale was the first who conceptualised the idea of the three certainties. The case stated that for an express trust to be valid, the trust instrument must show certainty of intention, certainty of subject matter and certainty of objects.

Certainty of Intention

Certainty of intention is also known as certainty of words. This means that it must be clear that the settlor wishes to create a trust; independently from any particular language used. Looking at Re Kayford (1975), Megarry J said that, “the question is whether in substance a sufficient intention to create a trust has been manifested”. Kayford Ltd had disposed customer’s money into a separate bank account. Although not conclusive, it was held as an indication that there was an intention to create a trust. Words were necessary for the conclusion of this case because a trust was held on the basis of conversations between the company’s managing director, accountant and manager.

However, the word ‘trust’ may not be a conclusive evidence of the existence of a Trust. In the leading case Re Adams & Kensington v Vestry (1883), the testator said: “I give, devise, and bequeath all my real and personal estate…unto…my wife…in full confidence that she will do what is right as to the disposal thereof between my children”. Even though the words “in full confidence” were used, it does not give rise to legal obligation. Hence, in this case there is no trust.

Looking at past court decisions, one could note the emphasis made on the words used to create a trust. These must make it plain that ultimately there was an intention to create a trust. Today, in most instances, trust documents are drafted by professionals and one would hope that these should not present any difficulty to show certainty of intention.

Certainty of Subject Matter

The property subject to the trust must be clearly identified. There are two aspects to this requirement that include the certainty as to what property is to be held upon trust and the certainty as to the extent of the beneficial interest of each beneficiary (Norson B Harris, 2003).

In the court case Palmer v. Simmonds (1854) it was held that the phrase “the bulk of my residuary estate” was not certain enough for a trust relationship to subsist. However in another case Re Golay (1965), the statement “one of my flats and a reasonable income” was enough certain to constitute trust. When it comes to distinguishing trust property from other assets, the courts have dealt with this according to the nature of the subject-matter involved. In Re Goldcorp (1995) the court held that the subject-matter in the trust was not separate form other assets and so the trust was not valid. On the other hand, in Hunter vs Moss (1993) it was held that even though the assets (which were incorporeal) are not separate, this does not hinder the constitution of a valid trust.

Certainty of Object

This relates to the idea that there must be, in general, a person or persons entitled to the benefit of the trust. Such beneficiaries must be clearly identified or at least ascertainable. The test for determining this depends on the type of trust being created. This beneficiary principle in fact is inapplicable to charitable trusts. Alternatively, beneficiaries may include people not born at the date of the trust (for example, “my future grandchildren”).

In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries. In the court case McPhail v Doulton (1971) it was established that in the case of a discretionary trust, there is certainty of object if you can determine whether any given person is a beneficiary or not. The Court held that with the wording used to create the trust there was conceptual certainty. On the other hand, in Brown vs Gould (1972) the words “my old friends” lacked precise definition and so the court held that there was no certainty of objects. In a fixed trust, the trustee has no discretion of how to delegate trust property and therefore the class of beneficiaries must be known or else the trust will fail. Objects here may be described as a class for example “my children”. When the validity of the trust is impeached because of lack of certainty of objects, the trustee will hold the assets on trust for the benefit of the settlor and his heirs.

2.3 Trust Property

The basic idea of the trust is that the settlor passes on full ownership of the property to the trustee. The settlor may write a document setting out his wishes in relation to the trust property and the trustee has the duty to execute those wishes. A trust is not created until there is an interest in property that is subject to the trust. If no property is immediately made subject to the trust, the trust will not come into existence. Generally, property of any sort may be held on a trust, from a lump sum of money or bank deposits to real property, stocks and shares. While the trustee holds legal title to the trust property, the beneficiary or beneficiaries hold equitable title to the same property. Depending on the trust deed, the beneficiary will receive income from the trust property or receive the property itself, either immediately or in the long run.

One of the main issues discussed in the 1984 Hague Convention on the Law applicable to Trusts and their Recognition is that trust property is a separate fund and it does not form part of the trustee’s estate. Under the Maltese law, any transaction related to the property under trust is regulated by the Trust and Trustees Act and other laws that apply specifically to trusts (Xuereb N, 2010). Transactions relating to the transfer of ownership or other rights to or in property under trust shall therefore be carried out in the form and manner required by the law applicable to such transactions (Dr J.P. Chetcuti).

2.3 Trust Instrument or Trust Deed

In simple terms a trust deed is a formal documentation which binds the trustee to deal with the assets and income for the benefit of the beneficiaries. It should be drafted with utmost attention in order to reflect the real intentions of the settlor. If it is not draften with the client’s intentions, this may affect the validity of the instrument. Unlike a will, a trust is not registered as a public document but it is kept confidential. There are various types of benefits which can be created in a trust instrument including receiving income, use of assets, distribution of capital or a combination of these.

Among other things, a trust deed names a trustee, directs the trustee about how to manage and invest the assets in the trust as well as instructs him regarding when to pay out income and principal. It also lists out names and rights of the beneficiaries. Otherwise, one may also find a trust document which gives out only very simple guidance to the trustee. This is known as a discretionary trust. In this case, the settlor may draft a “letter of wishes” to serve as a guideline to the trustee (Maria Elena Gatt Floridia and Andrew Chetcuti Ganado, 2005).

In Malta, it is allowed to create customized solutions for each individual trust set up, hence, “off-the-shelf” trusts are rarely offered. Each and every trust is structured carefully according to the requirements of the settlor. Unlike some other countries, Maltese law permits the trust to choose to be governed by the laws of another jurisdiction provided this is specified in the trust deed (Finance Malta, 2010 p.101).

2.4 Classification of Trusts

While all types of trusts must have a settlor, a trustee, a beneficiary and some sort of property, they all don’t have to hold the same property, the same purpose and they don’t have to be created in the same manner. These differences give rise to the various types of trusts which exist today. One may find various classifications of trusts however the most basic classification of trusts derives from the way in which the trust is created.

Express Trusts

One of the most common types of trust is the express trust. This is created when the settlor deliberately and consciously creates a trust either to come into existence now or later upon death. Typically in such situations the beneficiaries are clearly identifiable and a trustee is appointed in order to manage specific property according to the terms set out by the settlor.

One may make further distinction between two categories of express trusts which include those that are deliberately created by the settlor (drafted by a lawyer) and those which according to the court’s interpretation show the true intentions of the settlor. In the latter situation, the settlor is not aware that he/she is acting as a settlor, but the court chooses to interpret such case as creating an express trust. However for any express trust to exist it is required that property is sufficiently identifiable, there is no uncertainty as to the identity of the beneficiaries and the legal title in the trust property must be transferred to the trustee before the trust can be effective (Hudson, 2003).

Implied or Resulting Trusts

The second classification of trusts (sometimes known as resulting trust) is implied by court and hence it is not created intentionally by the settlor. This can be further sub-divided into two which include ‘presumptive’ and ‘automatic’. When a settlor transfers property to a beneficiary and there is evidence which indicates that the intention for the property was to be held in trust refers to a presumptive implied trust. However, there are instances where this will not hold true, such as the case where assets are transferred form a husband or wife to their spouse. On the other hand, an implied automatic trust occurs when there is no intention expressed or any presumption of a resulting trust by the settlor, example where the beneficiaries are not sufficiently identified, or when the objectives of the trust are no longer relevant (Anon, 2010).

Constructive Trusts

The idea of a constructive trust is that it arises by operation of law. Hence, in contrast to an express trust, in this situation it is the court that makes an imposition on the parties to create a trust, regardless their intentions. A constructive trust is said to be an equitable remedy by court with the purpose of preventing someone who has unfairly got hold of the title to a property from being unjustly enriched. When the court decides that a constructive trust should take place, it is usually obliged that a person transfers title and possession of property to the beneficiary i.e. the person chosen by the court.

Hudson (2008) states that there are two ways of making use of constructive trust either to create a proprietary constructive trust or imposing liability to account on a defendant who has participated in a breach of trust. Proprietary constructive trust can come into existence by way of general constructive trust, trust relating to interference with property, trust relating to voluntary agreements and trusts used to reinforce fiduciary responsibilities.

2.5 Maltese Trusts

“Whilst being a civil law jurisdiction, Malta has a fully-fledged trust law in place. Indeed Malta ranks among the few civil law jurisdictions that have developed the concept of equity by integrating it with an intrinsically civil law legislative system” (Fenech & Fenech Advocates, 2009).

By introducing a comprehensive regulatory and legal framework for trust and trustees, as well as the concept of trust into the Civil Code, Malta has been able to establish itself as a trust jurisdiction worth looking for. A choice of trust jurisdiction will inevitably be the result of the careful consideration of a number of factors ranging from the regulatory framework, the expertise of service providers, costs and the judicial system (Malta Trusts, 2010).

Malta has been able to emerge as an attractive jurisdiction for the holding of assets of international high net worth entities. Other than imposing itself as a viable trust jurisdiction, the Maltese legislator has also been very careful to ensure that nothing in the Maltese law can impinge on the freedom of international trustees from operating in Malta. In addition, since the introduction of trusts to Maltese residents in 2004, the domestic trust industry and practice has grown considerably.

2.5.1 History of Maltese Trust Law

Although generally the trust concept is not found in countries like Malta (whose legal system is based on civil law), as part of Malta’s development as an international finance centre, Malta does in fact have a codified trust law.

“The Maltese Trust law is essentially based on the civil law approach, having its roots in the Napoleonic Code, with sparse influences from the common law system, the latter being more profuse in the commercial legislation” (Tonio Ellul, 2010).

As a result of over 150 years under British rule, the legal system was influenced profoundly by a large number of statutes which derive from English Common law. This influence has continued until recently, when Mala joined the European Union and thus, it had to abide by the EU legislation system. Particularly, Maltese lawmakers increasingly relied on UK statute with regards to the commercial sector, insurance, banking, tax and company law. This has been the case up until the legislative harmonization with the EU legislation in the last decade or so

(Anon, 2007).

During British times, trusts law and equity relating to trusts were never statutorily incorporated into Maltese law and these were rarely mentioned in legislation until 1988, when the Offshore Trusts Act was enacted (Institute of Financial Services Practitioners Malta, 2008). The Act, which was largely modelled on the Trust Jersey Act 1984, introduced trust law and trusts into our legal system as a ‘ring-fenced product’ available only to non-residents. The settlor and the beneficiary of the trust had to be residents outside Malta. It was prohibited that any immovable property situated in Malta and any shares in Maltese registered companies could be held on trust. In the 1990’s this concept of ‘ring-fencing’ was removed from the financial services sector and the ‘Offshore Trust Act’ was re-named as the ‘Trust Act’ (Dr. Matthew Bianchi, 2005).

Eventually, in 1994 the ‘Recognition of Trusts Act’ was introduced which enabled the ratification of the Convention on the Law Applicable to Trusts and their Recognition (which came into force in 1996). This amendment introduced a general concept of trust and distinguished between Maltese trusts and foreign trusts (governed by a foreign law). The Hague Convention on the Law Applicable to Trusts and their Recognition outlines the main features of the trust and the consequences flowing from the creation of a trust, facilitating their recognition and use in civil law states.

The drafting of a new trust law began in the early 2000’s and in 2004, the Trusts (Amendment) Act was enacted, enabling Malta to honour its international commitments towards the OECD [1] and the FATF [2] . Some of these amendments include eliminating the nominee regime, abolishing certain rules on confidentiality, re-positioning Malta as a reputable international onshore financial centre and establishing a detailed regulatory framework for trustee and fiduciary activities. In this regard, the MFSA is the competent authority for the purpose of the Act. As part of these amendments, the Trusts Act was also renamed the Trusts and Trustees Act (TTA). The Trusts and Trustees Act came into force on the 1st January 2005 (Malta Trust, [no date]). Under the TTA any registered trust must have a Maltese Professional Trustee as one of its trustees.

One may note that this new law has affected various other laws including the Civil code, notarial laws, company law and fiscal laws. With the enactment of this act, Malta moved closer to becoming an on shore regime, with the creation of a framework in which the use of trusts is appropriately marketed.

2.5.2 Uses and Benefits of Trusts in Malta

Trusts can be tailor-made for a number of uses, depending on the specific requirements and circumstances of the individual. Such uses can be categorized into two broad classes namely private uses and uses of a commercial nature. While private trusts deal with the ‘inter vivos’ or ‘causa mortis’ needs of private individuals, on the other hand commercial trusts offer practitioners in the commercial world a variety of tools which can be drawn up in particular contexts to provide for commercially useful results (Tonio Ellul and Annalise Michallef, 2010).

Private trusts can be employed to provide for situations mainly involving family members, such as providing for children with special needs or to protect a spendthrift beneficiary from dissipating the patrimony left to his benefit. These can also be used for asset protection, estate planning, preservation of wealth and confidentiality. With regards to asset protection Malta offers a secure and stable political environment in which to hold assets and protect them from strategic risk.

Commercial trusts under Maltese law rage from security trusts to the use of trust in setting up collective investments schemes and in the context of security offerings. Unlike private trusts, commercial trusts are afforded greater flexibility, security and certainty by allowing the parties to participate in setting up the trusts and allow the possibility to shape their instrument in the most applicable mode to suit their commercial needs (Tonio Ellul, 2010). The trust legislation identifies a number of scenarios qualifying as commercial transactions such as the use of trusts for:

Collective Investment Schemes,

Securitisation of assets,

Granting of real or personal security,

Securities offerings, whether to the public or for private placement,

Portfolio management,

Custody of investment instruments,

Syndicated loan agreements and other multi-creditor banking facilities; and

Insurance policies and the payment of proceeds thereunder (Dr James Scerri Worley, 2009).

With the development of Malta as a financial services centre and with the enactment of special laws and regulations, Malta became known as a trust jurisdiction offering a variety of benefits to whoever makes use of them. Regulation of trusts and trustees reveal a great commitment by Malta towards the trust industry and hence one may regard such jurisdiction as being open to progress whilst ensuring that standards are maintained.

There are a number of benefits in setting up a trust including confidentiality, flexibility and tax treatment. Malta offers a considerable low set-up and administrative cost. The difference in the cost of setting up a fully fledged trust between jurisdictions depends significantly on the professional fees, such as legal and audit fees (Finance Malta, 2010). When compared to other traditional trust jurisdictions, Malta trusts offer a number of advantages including the trust legislation itself, offering settlors a higher degree of assurance while making Malta more attractive to international clients. For example, a trustee has to be licensed by the MFSA [3] . The Trustee code of conduct was drafted by the MFSA in 2005 pursuant to article 52 of TTA. The purpose of this document is to provide guidance to trustees, to abide by the required standards and to ensure the best practice in the industry. In addition, Malta trust law offers security that other jurisdictions do not. In case of any conflicts between the trust and any other Maltese law, trust law prevails.

2.5.3 Predominant types of trusts used in Malta

In the Institute of Financial Services Practitioners Malta (2008) publication, it has been suggested that the Maltese law identifies the types of trusts which are found in the traditional Anglo-Saxon jurisdictions. Some of the types of trusts which Maltese Trusts can take the form of include; discretionary trusts; fixed interest trusts; accumulation and maintenance trusts; spendthrift trusts; charitable trusts; implied, constructive or resulting trusts.

Discretionary Trust

This is the most common type of trust where the trustee has the discretion as to how to manage and invest trust property, who to appoint as beneficiaries, when to distribute income and capital as well as to whom such distributions are made.

Fixed Interest Trust

The main feature regarding Fixed interest trust is that the trust deed will state how much capital and income should be distributed to specific beneficiaries. Sometimes this type of trust is also known as interest in possession trust.

Both discretionary and fixed interest trusts are recognised by Maltese law in Article 2(1) which defines a beneficiary as: “a person entitled to benefit under a trust or in whose favour a discretion to distribute property held in trust may be exercised”.

Accumulation and Maintenance Trust

With regards to the Accumulation and Maintenance trust, Maltese law caters for such trust in Article 26 of the TTA. The trustee is allowed to accrue and accumulate capital for the benefit of the beneficiaries. Such capital will then be distributed at a later stage according to the trust deed. An example of this type of trust include Education Trust, in which money are set aside for the purpose of children’s education.

Spendthrift Trust

This is a trust which is created for the benefit of a person who is unable to control their spending. The trustee will have the power to decide how to manage property vested in the trust for the benefit of the beneficiary. Spendthrift Trust offers peace of mind that the beneficiary may not spend a lump sum of money at one go. It will also limit the rights of the beneficiary’s creditors (if there are any) to reach trust assets before they are actually passed on to the beneficiary.

Charitable Trust

According to Chapter 331 of the Trust and Trustees Act a “charitable purpose” means any charitable or philanthropic purpose, and without prejudice to the generality of the aforesaid, includes in particular:

(a) the advancement of education, including physical education and sports;

(b) the advancement of religion;

(c) the advancement of health;

(d) social and community advancement;

(e) the advancement of culture, arts and national heritage;

(f) the advancement of environmental protection and improvement, including the protection of animals;

(g) the promotion of human rights, conflict resolution, democracy and reconciliation;

(h) the promotion or protection of the interests of other social purpose organisations, including federations of such organisations; or

(i) any other purpose as may be prescribed by the Minister by means of regulations made by virtue of this Act.

However, these types of trust are not the only ones found in Malta. Others include Special Needs trust, Mixed trust, Protective trust and other forms of trusts used for the creation of a pension scheme, employee benefit plan and collective investment funds.

One of the current developments with regards to the types of trusts used in Malta is the Trust Account. A Maltese trust account is basically a deposit account which is opened in the name of the banks as the trustee. This gives the possibility of enjoying certain trust related benefits on a bank account (Finance Malta, 2010). There are various advantages of a trust account including confidentiality, flexibility, asset protection and tax exception for non-resident beneficiaries. Details of the account, of the settlor and the respective beneficiaries will only be known by the bank. The settlor may change the residual beneficiaries as well as the proportion of their benefit at any time with minimal formalities.

The account may serve a substitute for a will, since upon death of the settlor, the account balance will be transferred to the beneficiary. However it is different from any other savings account opened in the name of minors in that the settlor do not require any Court approval to withdraw funds from the account and when minors attain majority at law, they still do not have access to the funds if the settlor is still alive. Upon the death of the Settlor, the residual funds may also be distributed to a charitable institution nominated by the beneficiary.

2.5.4 Foreign Settlors and Maltese Trusts

The Trust and Trustees Act has introduced a number of developments with respect to Maltese private international law relating to the trusts including foreign domicilaries settling Maltese or foreign law trusts. If foreign settlors wish to settle property in trust, this can be done by either choosing Maltese law or foreign law to rule such trust. However the rules applicable to trusts, make distinction between common law domicilares (such as an English person) and civil law domicilaries (like an Italian person) (Dr. Matthew Bianchi, 2005). One of the significant aspects is that when a trust is established under the laws of Malta, provided that residents of Malta are excluded from receiving benefits from the trust, then there will be no local taxes applicable to the assets and income of the trusts.

2.5.5 Current Developments

In the issue of April 2010, the IFSP [4] has published an article relating to the revision of Malta’s trust laws. Now that about six years have passed from the last enactment, it has been suggested that such laws should be revised and refined. A sub-committee led by Dr Juanita Brockdorff has produced a document which was handled to the MFSA, proposing changes the industry. Several players within the industry such as STEP [5] Malta, Notarial Councli and the trustee units of Malta’s two largest domestic banks, gave their input regarding this issue. In the Practitioners Update July 2010 issue, the IFSP stated that the ‘Trust ad hoc Working Group’ prepared a memo containing the comprehensive proposals for the revision of the TTA as well as a series of other laws that have bearing on trusts. The MFSA now holds an established committee which is concerned with the draft of this revised law.

2.6 Jersey Trusts

Jersey Trusts have been in existence for a very long time, gaining international prominence as well as gaining recognition as an off-shore centre. It is also known for its international banks as well as its legal services that make provisions for professional Trustees.

2.6.1 Trust System in Jersey

Jersey trust law has been one of the laws which provided guidance (in relation to trust) to other jurisdictions and it is largely based on the English common law. Enforced by the Jersey Courts, the trust law imposes fiduciary duties on trustees while regulates the administration of trusts and provides rights to beneficiaries. Jersey trusts are governed by The Trust (Jersey) Law 1984 which was further amended as seen in the following table.

Table 2.1 Legislation History

In addition, the Hague Convention on the Law Applicable to Trusts and on their Recognition was also ratified. Due to the recent international developments, in 2008 the Economic Development Department published a consultation paper reviewing Jersey’s trust law.

2.6.2 Utilization of Jersey trusts

There is a rage of uses to which a trust may be employed including financial planning, preservation of wealth, reservation of powers, succession planning and forced heirship. Part